From billionaire veterans like Carl
Icahn, Nelson Peltz and Paul Singer to younger hedge fund stars like
Daniel Loeb, this has become a golden age for activist investors who like
to take big stakes in publicly-traded companies and shake things up with
merger proposals, proxy contests and recapitalization schemes.

Company CEOs like Michael Dell, venture
capitalists like Ben Horowitz, superlawyers like Martin Lipton and even
movie stars like George Clooney might not like it, but personality-driven
activist investing has become a rising force in American business and
finance. The once derided investment strategy has become a popular,
permanent and ever-present feature of U.S. business that is more
frequently being used to target companies operating in a broader range of
industries and exported to foreign lands by prominent American investors.

In the first six months of 2013, 14
activist campaigns were launched involving companies with market
capitalizations greater than $1 billion, according to FactSet
SharkRepellant. That matches the activity that took place in the first six
months of 2012, a huge activist year during which 21 activist campaigns
were initiated against companies with market caps of $1 billion or more.
By contrast, in 2010, there were 11 such campaigns started and a decade
ago in 2003 there were four. Investment capital is pouring into activist
investing strategies as this genre of investing has become one of the few
bright spots in the rich hedge fund industry that has seen the vast
majority of its highly-compensated managers underperform the U.S. stock
market and low-fee index funds in recent years. In July, the activist wave
got even stronger with four prominent hedge funds launching ambitious
campaigns, including Dan Loeb’s Third Point hedge fund’s investment in CF
Industries and ValueAct’s move on Microsoft.

Activist investing is “up in terms of
activity pretty substantially,” Mark Shafir, global head of mergers &
acquisitions at Citigroup
told CNBC
recently. “People are making money doing this in the work we have
done relative to some of the other long/short strategies and some other
strategies and so we think it’s going to continue and it’s going to become
more and more part of the landscape.”

Once disparaged as greenmailers and
corporate raiders who pillage for quick profit, activist investors have
become rock stars and rebranded themselves as advocates of all
shareholders, taking on the kind of shareholder watchdog role that
institutional investors like big pension funds and mutual funds have long
resisted. They are not done rebranding themselves. Peltz, whose Trian
Management oversees $6.5 billion, describes his investment style not as
activism but as
“constructivism.” Larry Robbins, who runs $6 billion hedge fund firm
Glenview Capital Management, one of the
best-performing hedge funds over the last 18 months, wants to be seen
as a “suggestivist.” The idea is to appear less threatening while trying
to do things like replace the management and board of directors of a
company, like Robbins is trying to do at hospital company Health
Management Associates. “In Hollywood terms, we are more Mr. Spock than
William Wallace,” Robbins recently said. “I get a lot more out of these
CEOs by not embarrassing them publicly, by not being viewed as trying to
nail their scalp to the wall,” Barry Rosenstein, the prominent activist
investor who runs $5 billion Jana Partners,
told
The Wall Street Journal.

Others, however, have a different way of
describing what these guys are up to. “In what can only be considered a
form of extortion, activist hedge funds are preying on American
corporations to create short-term increases in the market price of their
stock at the expense of long-term value,” famed lawyer Martin Lipton wrote
earlier this year. “The consequences of radical stockholder-centric
governance and short-termism prompt a series of questions that cry out for
re-examination.” Lipton, the most prominent defender of corporate boards
in their battles with activist investors and the inventor of the so-called
poison pill defense tactic, even suggests that the new wave of activist
investors might be responsible for “a very significant part of American
unemployment and a failure to achieve a GDP growth rate sufficient to pay
for reasonable entitlements.”

Lipton has been blasting activist
investors for decades. But last week activist investing went Hollywood as
George Clooney attacked Dan Loeb, who has been criticizing the management
of Sony Pictures Entertainment as part of his effort to get Sony to spin
off its U.S. entertainment assets. “[Loeb] calls himself an activist
investor, and I would call him a carpet bagger,”
Clooney told Deadline.com. “What he’s doing is scaring studios and
pushing them to make decisions from a place of fear. Why is he buying
stock like crazy if he’s so down on things? He’s trying to manipulate the
market.” Clooney said activist hedge fund managers like Loeb don’t create
jobs, unlike the movie industry that is a significant U.S. exporter.

But while Clooney’s production company
has a contract with Sony, he doesn’t own a big chunk of the company’s
shares and activist investors have long argued that their ownership in
companies gives them a say in how a company should be run. They also
believe companies should be run with the shareholders in mind and with a
corporate governance structure that his focused on creating as much
shareholder value as possible. This long-held belief continues to be
challenged with powerful corporate leaders
like
Google’s Eric Schmidt supporting the idea that companies should be run
first and foremost
to create and maintain customers and users. Ben Horowitz, the big
Silicon Valley venture capitalist whose firm backed Facebook, Twitter and
Groupon, has been more blunt,
cautioning founders of companies to beware of activist shareholders.

Nevertheless, activist-investor efforts
to drive shareholder value at companies seems to be all over the financial
markets. The renaissance is best typified by billionaire investor Carl
Icahn, who is going stronger than ever. With more money at his disposal
than ever before, Icahn, now 77, has been a huge player in financial
markets in recent months. He has vigorously taken on Michael Dell’s effort
to take Dell private, played a role in kicking Aubrey McClendon out of
Chesapeake Energy, and is at the center of the billionaire brawl over
Herbalife. He has enjoyed rich recent successes from companies ranging
from CVR Energy to Netflix. His Icahn Enterprises has seen its stock rise
by 57% this year. Icahn hasn’t changed his tune in years and recently
argued that
“what I do is good for America.”

Wall Street used to be a place where
so-called Tiger Cubs were born. These were the offspring of Julian
Robertson, the legendary hedge fund manager who nurtured several traders
who went on to start their own prominent hedge funds that helped grow the
industry. Now, there are also Icahn-trained activists roaming the
financial markets, like Keith Meister, the former Icahn lieutenant who now
runs his own $2 billion Corvex Capital hedge fund and successfully got
shareholders to vote out the board of CommonWealth REIT. Mark Rachesky’s
MHR Fund is on a huge role and the former Icahn understudy has been
teaming up with his mentor to push for changes at Navistar. Even Icahn’s
son, Brett Icahn, has joined with father’s shop and is running significant
money, including masterminding Icahn’s Netflix investment.

Activist players are continuing to push
the envelope and bringing their brand of investing to new industry and
geographic frontiers. Dan Loeb, whose Third Point hedge fund has been one
of the best-performing hedge funds over the last 18 months or so, stormed
Silicon Valley, sparking sweeping changes to the flailing Internet giant
Yahoo’s management and
making about $1 billion in realized and paper profits. Now, he’s off
to Japan, trying to shake things up at Sony in a country that has long
resisted reform at many levels. Loeb is not the only brash American to
attack a foreign company and sometimes these guys even manage to win broad
support for their efforts in foreign countries. Not long ago, William
Ackman struck at Canadian Pacific Railway and his intervention has helped
spark a huge run-up in the stock. The business magazine of Canada’s
authoritative Globe and Mail newspaper didn’t call him a carpet
bagger, rather they branded Ackman, who is not a corporate executive, “CEO
of The Year.”

2013 Forbes.com LLC™

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